Analysts: Sports betting a good wager for Kentucky, Churchill Downs

Screenshot from Churchill Downs’ Riverwalk Casino in Mississippi.

Two Kentucky legislators have pre-filed sports betting bills, and industry experts told Insider that legalization would boost revenue for both the state and Louisville-based Churchill Downs.

However, two advocates who help problem gamblers warned that if the commonwealth legalized sports betting, it likely would push more Kentuckians into addiction — though they said the state could address that downside by earmarking some of the additional tax dollars to expand counseling services.

Chris Grove, a researcher with the Santa Ana, Calif.-based consultant Eilers & Krejcik, predicts that sports betting in Kentucky will go live as early as 2021 as part of a wave of 16 states that includes Indiana and Ohio. At that point, though, he said, sports betting already will have begun in 11 states, including Kentucky neighbors Illinois and West Virginia.

“Regulated sports betting is a material opportunity for states,” Grove told Insider via email.

Courtesy of Eilers & Krejcik

The U.S. Supreme Court in May overturned a federal ban on sports betting, paving the way for states to determine if and how they want to allow people to wager on athletic competitions including professional football or basketball games.

Details about what sports betting would look like in Kentucky or who would oversee the industry or how additional revenue would be spent are yet to be determined. A bipartisan, bicameral state task force is studying the issue.

Locations, oversight, earmarking?

Matthew Stephens, general counsel for the Kentucky Senate Democratic Caucus, told Insider that state lawmakers are still discussing funding mechanisms, including whether to tax a share of how much money people bet — or how much betting operators generate in revenue after they pay out the winners.

Stephens also said that legislators are weighing whether to have the new sports betting industry overseen by an existing state body, such as the Horse Racing Commission, or a new agency.

In addition, he said, the representatives and senators are mulling where to allow people to place their bets, whether at existing gambling facilities, such as Churchill Downs’ recently opened Derby City Gaming, online, wherever people buy lottery tickets or all of the above.

Chris Grove

Grove, the consultant, said he expects the legalization of sports betting to increase Kentucky’s revenue.

“The important thing to remember,” Grove said, “is that much of this activity is already occurring, just in an unregulated fashion.”

“Overall,” he said, “there’s little debate on the point that sports betting will overwhelmingly generate new revenue as opposed to cannibalizing existing regulated gambling revenue.”

“That means a net win for states from a tax and economic perspective, as opposed to shifting of consumer activity from one bucket to another,” Grove said.

State lawmakers, too, expect sports betting to help fill their coffers, though it’s unclear how they will spend the dollars. A proposal from Rep. Dennis Keene, D-Wilder, would establish a trust fund, with 60 percent of proceeds going to the state’s pension fund, but a bill from Sen. Julian M. Carroll, D-Frankfort, would not require that any of the revenue be spent on specific purposes.

David Katz

David Katz, who analyzes the gambling industry for New York-based Jefferies, where he is managing director, said the legalization of sports betting also represents a big opportunity for businesses, especially those with gambling infrastructure and experience, such as Churchill Downs.

Beyond bringing existing sports bettors out of the underground, Katz said legalization also may make the activity more attractive to people who previously have stayed away from it because of its prohibition.

And once those people have placed bets, he said, they may even engage in other types of gambling. They may go to Derby City, for example, to place bets on a football game — and then try their luck at historical racing machines. That’s especially true if they can engage in sports betting and other gambling on their computers or phones.

Churchill Downs told Insider that it “is watching this issue but not interested in commenting at this time.” But the company clearly means to capitalize on the opportunity: In late August, for example, it announced the launch of sports betting at two Mississippi casinos.

“We are excited to get started and will take everything we learn from this experience to improve our offering in Mississippi and other markets over time,” CEO Bill Carstanjen said in a news release.

Derby City Gaming screenshot

Katz said companies such as Churchill Downs are preparing for sports betting with as little investments as possible and are examining whether they have the right capabilities to take full advantage — and are seeking partners where they find potential weaknesses.

In general, he said, companies with gambling expertise should have an advantage over startups trying to get into the sports betting business.

Churchill Downs already has technological capabilities and expertise, physical locations in various areas of the country, successful partnerships, and apps such as TwinSpires, which gives the company a database of customers who also may have an interest in sports betting, Katz said.

In addition, he said, Churchill Downs will benefit from its established and well-respected brand.

Consumers likely will have more confidence in being able to recover their winnings from well-known businesses — rather than from

Churchill Downs shares surged 11 percent in the week after the Supreme Court paved the way for legalized sports betting.

Problem gambling concerns

The legalization of sports betting likely also will increase the number of people who are addicted to gambling, two gambling addiction experts told Insider. They said states should mitigate the impact by expanding counseling and other services.

Keith Whyte

As more people gamble, more people will develop problems with gambling, said Keith Whyte, executive director of the National Council on Problem Gambling.

“Some of those new people may well get in over their head,” he said, “ … unless states take aggressive action to prevent and treat gambling problems.”

Even the severity of the problems may increase, Whyte said, as companies run promotions and ads to entice people to place bets on a game’s second half or fourth quarter or even after the two-minute warning.

The council calls on legislators to conduct surveys of gambling addiction prevalence before legalizing such activities and to earmark 1 percent of sports betting revenue to programs that minimize addiction.

Whyte said those and other steps the council has outlined make sense from both an ethical and fiscal perspective. Every dollar states spend on addiction prevention helps them save $2 on health, criminal justice and other costs, including lost productivity for businesses.

Michael Stone, executive director of the Kentucky Council on Problem Gambling, told Insider that while most Kentuckians gamble without a problem, about 9,000 have a gambling addiction, and they cost the state an estimated $81 million a year.

Additional services to help people deal with their addiction are “desperately needed,” he said, as the state only has nine certified gambling counselors.

The KYCPG also points to studies that indicate the impacts of gambling go far beyond money and include increased risks for substance and domestic abuse as well as suicide.

At the same time, given that a lot of sports betting already is occurring illegally, determining the impact of legalizing sports betting on the number of addicts is difficult, Stone said.

“I don’t know,” the impact, he said. “And I don’t think anybody does.”

Whyte also warned that legalization can present tough challenges for states, because they are competing with illegal competitors who do not have to collect taxes nor prevent teens from placing bets, he said.

“I think that race to the bottom can be very dangerous,” he said.

Whyte and Katz also said that the size of the illegal sports betting market, which the American Gaming Association has pegged at about $150 billion, is difficult to ascertain, as is how much of that will be transferred into the legal arena.

And while Grove expects sports betting to be legal in more than half the states by 2022, and eventually in all but six states, Katz said that legalization of sports betting may take longer than people expect, in part because supporters typically face a vocal opposition.

“That tends to slow down proliferation,” Katz said.